Most readers in the Northern Hemisphere will probably agree that the winter season has lasted long enough and it is high time we turned the calendar page over to springtime, though preferably without floods.  Calendars and seasons are also relevant for the markets – from the summer lulls to ‘January effects’, we are always on a lookout for signs of relative simplicity, reflecting our animal sensitivity to nature’s cycles.

The relevance of seasons to the gold market is a question of debate.  As the importance of Indian gold demand grew since the 1980s, the interest in South Asians’ purchasing patterns grew.  Although recently the increased affluence of Middle Eastern and Chinese buyers may have also turned the spotlight on the timing of Eid-al-Fitr and the promotion of October Golden Week in the PRC, the seasonal impact of these dates on global gold demand has not yet been firmly established.

On the other hand, it is well known that Indian jewelers usually replenish their inventory several weeks before key festivals and auspicious dates.  Most attention has been paid to restocking in January and in September – roughly two months prior to the traditional wedding seasons.  Even though re-smelting of family gold has been commonplace, the ubiquity of 22 carat bridal ornaments (traditionally consisting of two earrings, two bangles, a nosering, a necklace and one ring) turned the South Asian wedding season into a yardstick used to indicate by how much COMEX paper gold trading may have diverted from the “fundamental” demand.  In fact, the actual volume of purchase by jewelers would vary, depending on the prevailing gold lease rates and expectations of future gold price.

A glance back at the last ten years of gold price data allows us to determine if stronger demand from South Asian holiday seasons could influence gold investors’ returns and risks.  By compiling quarterly data of the last decade, we quickly find that the fourth and the third quarter offer the strongest average returns (6.4% and 5.1%, respectively).  The second quarter sports the lowest returns (1.7%), but also the lowest volatility.  It also turns out that the volatility peaks in the third quarter.  Using an average 3-month Libor for the last 10 years, we find that the fourth quarter returns have the highest Sharpe ratio, outperforming quite significantly the 3rd and the 1st quarter (in this order).

The second observation that can be made is that the inter-seasonal returns, chunked out into four quarters each year, present little variability over time.  The intra-year standard deviation of these returns varies somewhat between the low of 3.15 in 2002 and the high of 7.90 in (the otherwise extraordinary) 2008.  However, it would be misleading to believe that there is a rising trend to this variability, given that the second highest standard deviation was registered in 2001 and the second lowest in 2009.

We cannot, therefore, entirely refute that the November-December wedding season does solidify the gold demand.  Still, this very basic analysis suffers from a somewhat ethnocentric bias.  South Asian wedding calendar does not obey the rules of the Gregorian calendar, but follows the regularity of the traditional, Hindu calendar.  It begins in March-April (during the month of Chaitra) and ends in February-March (Phagun).  This year, Chaitra began March 1, coincidentally close to China’s post-holiday season.

I decided to shift our quarters by two months, to reflect the beginning of the Hindu calendar.  This exercise chunks out the seasonality into four equal periods: Mar-May, Jun-Aug, Sep-Nov and Dec-Feb.  And – surprise, surprise – a very different picture emerges.

First, we find that the variability of returns is much more pronounced.  It ranges from 8.15% in the Sep-Nov “quarter” and 7.8% in Dec-Feb “quarter” to a loss of almost 0.4% in Jun-Aug “quarter”.  Note that the Sep-Nov period covers both the restocking binge (Sep) and the period including the key festivals: Navaratri, Dussehra and Diwali.  On the other hand, the Jun-Aug period falls shortly after Akshaya Tritiya (during the Hindu month of Vaishakha, this year falling on May 16).  Akshaya Tritiya happens to be the last significant summer festival.  There are very few auspicious dates and no major festivals until after the monsoon season.

We can also observe that the standard deviation of returns varies much more among the shifted “Indian quarters”.  As a result, the Sharpe ratio is negative early in the year and then picks up significantly from September till February.

But the most unexpected finding from this statistical overview comes from the comparison of data for inter-seasonal volatility.  Unlike in the case of traditional (“Western”) quarters, the modified quarters show a strong and rising tendency in inter-seasonal standard deviation.  It increased from 1.68 at the beginning of the century, to 7 in the middle of the decade, to 14.5 and 12.6 in the last two years.

This difference in the seasonal volatility of the returns is too consistent to be entirely accidental.  It could mean that, contrary to our expectation of the East Asian demand gradually offsetting the traditional Indian seasonality, the seasonal variability of the demand has actually deepened over the years.  In other words, as the price of gold has gone up (in Rupee terms), the consumers purchase gold when they really have to, with much more secondary product flowing back to the market around the dates which are not known to be auspicious for major family or community events.  This was born out recently by dishoarding in India, which was particularly pronounced early in 2009.

This subtle shift from the rhythms from Antonio Vivaldi to Pandit Pran Nath also offers a lesson for value investors who are keen to time their purchase properly.  Avoid large purchase in Dec-Feb period.  Begin accumulating from March, but reserve the bulk of your purchase for the summer.  And if you wish to realize profits according to the calendar, make sure your liquidity allows you to stick around until late September or early December.  Otherwise, pray for a good monsoon and a strong Rupee.